Consumer companies had been so far banking on the rural economy to survive the slowdown in the last one and half years. But now even the rural growth story is not holding up, making the going even tougher for the fast moving consumer goods (FMCG) sector.
In the quarter gone by several companies have realised that slowdown has become more entrenched in the rural sector. This comes at a time when monsoon last year had been 20-30% better than expected and this was expected to boost rural income and in turn improve the rural consumption scenario.
Despite the fact that some signs of slowdown was being witnessed in the rural sector, its after a long time that in certain pockets the rural economy grew at a slower rate than urban. For instance, Vivek Gambhir, MD, Godrej Consumer Products Ltd (GCPL) explains that, "Last quarter in home and personal care, rural grew at a slower pace than urban. And this is happening after several quarters. While the growth in urban was 6% in rural it was only4%."
Experts believe that this is because the inflation in the rural areas was even higher than the urban areas in the last three months and this has taken a toll on demand. Analyst believe that companies that have a higher rural penetration are likely to be affected more than companies who still have a slower contribution coming from the hinterland.
Rural market, according to Vijay Udasi, executive director, Nielsen India, has definitely seen some sort of sluggishness and slow down in the growth momentum. Simply put, the rural FMCG market is growing in the range of 12-14% in 2013 while last year the growth witnessed was between 20-22%.
"Why is that happening? The impact of various things like economy, government spending, higher food inflation and of course the overall inflation is now catching up in the rural markets. While income levels have not really grown in the same proportion, expenses certainly have that too in double digits thus forcing rural consumers to tighten their spends. In simple words, rural consumers are trying to balance their income versus expenditure," said Udasi.
While the government continues to spend on the infrastructure and services government's own data shows that the rate of increase in such expenses in the recent past has actually come down. Rural consumer is thus trying to cut down on their discretionary spending including in the area of FMCG especially in the non-food segment like personal grooming (hair care, personal care) which has seen more slowdown in demand as compared to food products.
Bajaj Corp, the makers of hair oil brand Bajaj Almond Drops has also seen a significant slowdown in the rural space. In fact, rural demand growth for its hair oil came down from 23% in the first quarter of fiscal 2014 to 18.6% in the second quarter followed by 11.7% in the third quarter.
Sumit Malhotra, managing director, Bajaj Corp said that, "Just like urban areas, people are becoming more conservative on trying out new things, especially those that are a little expensive. In the current scenario both because of inflation and negative market sentiment people are not trying out new brands. They are happy with what they are spending on or what they are using, and if at all they want to change, cheaper alternatives are being looked out for."
A distributor survey by Rakshit Ranjan of Ambit Capital further proves that the growth in the rural areas is moderating, just like the urban counterpart. "However, whilst our distributor checks during second quarter had suggested only a marginal weakness in year-on-year rural growth rates, our channel checks during third quarter of this year suggests that rural revenue growth rates have moderated by 3-5 percentage points across several product categories during the third quarter."
Having said that, every thing isn't slowing down in the rural markets, feels Udasi. "The food segment continues to see a healthy 16-18% growth but because times are tough consumer are trying to balance out their spending even within the food segment. So from downsizing the purchase basket to moving on to cheaper alternatives and lastly picking up the unbranded product is typically how the consumer behaviour currently is in the rural markets," said Udasi.
Given the way things are panning out, the FMCG players are of the opinion that things have bottomed out yet. "If inflation continues to trend the same way the drop in rural demand growth for the entire FMCG sector will continue in the fourth quarter and if my estimates are right in the first quarter of next fiscal as well - unless of course there is any significant change in the policy matters that get announced post the election results," said Malhotra.